Removing Blockades To Aircraft Funding In Africa

By Roland Ohaeri

Compelling
Trends

There is a remarkable shift in the trend of airline operation
and evolution globally which is underlain by the quest for economic
and ecological efficiency gains, as well as enhanced safety,
compelled by global pressures and self-imposed regulation within
the aviation industry. Airlines are now required to produce
incrementally reduced levels of carbon dioxide (CO2) and other
environmentally harmful gases, and noise as well. Thus, aircraft
makers anticipate accelerated retirement of older aircraft over the
next 20 years. In addition, as fuel cost gulps up about 30-40 per
cent of expenditure of most airlines, the use of less fuel per
flight operation becomes crucial for airlines. Operators are,
therefore, compelled to seek aircraft and technologies that provide
eco-efficiencies and help their bottomlines overall. Says
Bombardier: "It may not be economically feasible to retrofit older
aircraft cockpits with the required avionics technology, rendering
these types obsolete…Planned airspace modernization in the United
States (FAA NextGen), in Europe (Single European Sky) and elsewhere
will require advanced flight deck avionics technologies. These
dynamics will result in a reduction of the business jet fleet
half-life (age at which 50% of aircraft have retired) from 40 years
in 2010 to 30 years in 2030. The amount of aircraft that retire
within the forecast period will vary considerably by region." For
Africa, as there are yet no stringent ecological restrictions
within the continent - maybe due to low volume of traffic compared
to other regions (Africa controls 3% of global traffic) - the
retirements of ageing aircraft may be relatively slower in the
short- to medium-terms. Domestic and regional airlines in Africa
may face the immediate challenge of economics as key consideration
for seeking replacement aircraft. However, State regulations and
passenger preferences could still drive airlines to go for more
modern aircraft as already seen in Nigeria
where there is a ban on aircraft over 22 years. The demand for
newer aircraft would be more pronounced among African carriers on
long-haul and regional operations. Also, though helicopters are
mainly for charter operations especially in the on-shore and
off-shore oil services in Angola, Nigeria, etc., their age,
customer specifications and impact of new technologies would also
demand their replacement over the next 10 to 20 years in Africa.
Airbus and Boeing say resilience of passenger demand following
industry and economic crises in the last decade gives confidence
over sustainable demand for air travel. By 2030, Airbus predicts
there will be 87 mega aviation cities globally with some in Africa.
Already, cities like Accra, Lagos, Cairo, Luanda, Addis,
Johannesburg, etc. are having more than 10,000 daily long-haul
passengers, with increasing participation of African airlines.
Anticipated liberalization will equally give African airlines
access to African markets, creating need for more aircraft for
expansion.

Aircraft
Needed

According to Boeing, Africa would
require about 800 new aircraft over the next 20 years. However,
some may adopt older airplanes from the re-use market as a
stop-gap. The Boeing 767 for Kenya Airways is makeshift pending the
delivery of the game-changing Boeing 787; Ethiopian also resorted
to leasing airplanes like the B757 awaiting the arrival of the 787.
For regional aircraft, Bombardier believes the 20- to 59-seat
segment remains a key component of the regional airline industry.
Demand for new aircraft in this segment is expected to arise in the
latter half of Bombardier's forecast period (2010-2030), with some
300 units delivered, and in particular, "Russia, Africa and Latin
America will see considerable absorption of used 50-seat regional
jets."

Aircraft Cost

The cost of airplanes for African airlines in the near- to
longer-terms comes to billions of US dollars. Airbus' least price
for the A318 is $65.2 million, for example, while Boeing's 737-600
comes at $59.4 million. Prices could go up $290 million and more.
For turboprops, costs could be anywhere around $15 million and
higher. Generally, the re-use market sees lower costs,
though the efficiencies could also be reduced as age and flight
cycles increase, etc. Fleet renewal is continuing in various
African airlines showing that though new airplanes are costly they
are equally essential for African carriers. This passes the message
that Africa is not a refuse dump for old or retired airplanes. The
main challenge, however, is to ensure that more African carriers
can acquire modern aircraft as it becomes more imperative to use
aircraft with greater efficiencies.

Removing Hindrances To
Aircraft Funding

For African airlines to have easier access to aircraft funding,
deliberate efforts are compulsory to eliminate blockades barring
airlines from sources of aircraft funding. Mainly, airlines rely on
banks and financial institutions, as well as export credit agencies
(ECAs), government guarantees and initial public offer (IPOs),
etc., to raise funding for aircraft acquisition. The relationship
or perception between airlines and these sources need be healthy;
for IPOs, airlines must secure investor confidence. Some African
governments have become more supportive to well performing airlines
such as South African Airways and Kenya Airways, according to
sources from these airlines. The US Ex-Im Bank has participated
significantly in aircraft acquisitions in Africa over the years and
shows renewed commitment to more African airlines' acquisitions
like Rwandair's B737-800, Precision Air ATR-42 and -72,
Kenya Airways B787, and even to small domestic and charter carriers
in Africa that have removed blockages that discourage funding.
Furthermore, it is widely held that bigger airlines in Africa are
more likely to get funding support than smaller carriers.
Conversely, airlines like Precision Air and South African Express
Airways, Air Namibia and Rwandair are not as big as EgyptAir, Kenya
Airways or Ethiopian which lead fleet transformation in Africa; but
they have also attracted funding for new aircraft.

This simply means that all airlines
must adopt healthier business models and management systems to
become more attractive to financiers. South African Airways'
ability to come back into the black is predicated upon the
airline's resolve to cut costs which makes revenue more meaningful,
according to a Manager at the airline.

Further, there are concerns that
the economic crisis in Europe has cut down interest of financial
institutions in the region in funding aircraft acquisitions. The
impact of this, however, is expected to be mitigated by renewed
resolve of the US Ex-Im Bank towards Africa, added to strengthening
funding energies from China, Japan and India. BOC (Bank of China)
Aviation, for instance, recently signed first-ever agreement with
South African Airways for the lease of two new A320-200 aircraft
scheduled for delivery in 2012. Ms. Siza Mizmela, Chief Executive
Officer of South African Airways, anticipates "a long-term
relationship," and Mr. Steven Townend, Deputy Managing Director
& Chief Commercial Officer of BOC Aviation looks forward to
"building on this initial deal."

The Cape Town Convention also provides easier access to
aircraft, and more States are encouraged to ratify and domesticate
the Convention to benefit their airlines. According to Mr. Kostya
Zolotusky, Managing Director, Capital Markets Development, Boeing
Capital, as the number of signatories to the Cape Town Treaty -
which ensures the rights of aircraft creditors - continues to
expand, "airplane assets have recently become even more valuable
components of financier portfolios around the world." However, to
clear the hindrance of airlines' inability to benefit from
the Convention, States must ratify and domesticate the Convention.
Lured by robust economic trends, African financial institutions
also show interest in funding aircraft acquisitions, though some
tie this to stringent conditionalities. In their present state,
however, even willing financial institutions need to strengthen
their financial position to gain capacity to support huge cost of
aircraft.

Airlines can also consider the
option of leasing or sale and lease back of aircraft - as against
outright purchase, which would require greater funding and limit
the number of willing financiers. Mr. Zolotusky says this is a
current trend among airlines. He also notes that observers have
spotted trends, over the years among lenders, of placing greater
emphasis on the value of airplanes as assets, and relying less on
airline creditworthiness as the basis for funding airplane
purchases. This is because "the value of airplane assets had proven
very solid, both through cyclical industry downturns and a
punishing series of economic shocks, including geopolitical
conflicts, spiking oil prices, regional currency crises, the SARS
epidemic, and even the financial turmoil of the global recession,"
he says. While aircraft collateral has greatly expanded the scale
and scope of aviation finance, airline credits have remained an
important part of the overall industry financing structure, he also
adds, stating that "this raised the question of which side of the
airplane-asset/airline-credit equation investor confidence would
settle in the long-term." Thus, African airlines can explore
opportunities provided by these considerations.

Further, the notion that Africa is a region with poor credit
rating has been largely disproved by several successful aircraft
deals in all parts of Africa. While airline management must be
improved, airlines and other partners including governments should
ensure they bridge this gap of understanding to encourage
financiers see the good side of African airlines and tap into the
financing opportunities in Africa. And Economic and fiscal
policies in Africa must be such that would allow African airlines
to grow within and outside State boundaries, which would be
driven by liberalization and market access for African airlines
through the unreserved implementation of the Yamoussoukro
Decision.

This will assure financiers that
airlines have the best market environment to flourish given
Africa's growing economy. At the African Union level, States should
ensure control of civil or political crises to encourage financiers
to support airlines in these regions in Africa.

Last Line

The growing need for newer and
replacement aircraft in Africa is not in doubt given impelling
circumstances driving airline activities today. Whereas airlines
face difficulties to acquire needed aircraft, it is essential that
African airlines clean up their operations from within, and make
greater effort to understand the array of finance sources available
in the market and the preferences of various financiers. African
airlines, like others elsewhere, must keep to global aircraft
benchmarks to remain competitive.

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